Emerging market equity ETFs have amassed close to $50 billion year to date despite geopolitical turmoil brewing in the Middle East and anticipated interest rate hikes from the US Federal Reserve.
According to TrackInsight data, emerging market ETFs are up almost 14% in EUR terms year to date and over the past 12 months – although returns over the last month have been more choppy at minus 0.7%, but investors continued to allocate $1.5 billion during that timeframe.
Emerging market bonds have also gained $17 billion since 1 January, while returns turned negative in June and are currently minus 0.5%.
The numbers come thanks to improving global growth, a calm US dollar despite Fed tightening, renewed momentum in terms of commodity prices, relatively good corporate earnings and cheap stock valuations.
Emerging markets could still react to Fed policy
The Federal Reserve, which meets this week, is anticipated to raise interest rates to 1.5% for the third time this year. Fed officials are also expected to hike rates three times in 2018 – some banks predict four times – as the US gradually moves away from years of loose monetary policy as the economy improves.
Average interest rates across most advanced economies might reach at least 1% in 2018, which would represent the largest increase since 2006.
While this is good news for certain sectors like the US dollar and financial stocks, funds that may lose out are gold, high yield bonds and emerging markets.
Watch EEM as Fed hikes rates
All eyes will be on the iShares MSCI Emerging Markets ETF (EEM) after the Fed meeting. It is the most popular EM ETF with $37 billion under management, but is likely to lose cash if the Fed hikes rates because it could result in less foreign investment, more expensive loans, and US-dollar denominated commodities could generate less revenue in real terms.
So far, so good for EEM, which is up 30.6% year to date in USD terms, compared to 21% from the S&P 500, and has gathered $3.5 billion in that period.
The Middle East has hit the headlines again, however, as President Trump has announced the US embassy in Israel should be moved to Jerusalem, and a brewing power struggle between Iran and Saudi Arabia. The geopolitical tensions could affect the iShares MSCI UAE Capped ETF (UAE).